Decentralized Innovation for the Special Snowflakes
As a tough winter marches on, I am reminded of the adage parents sometimes hand down to their children: "Every person is a unique snowflake." It’s the kind of sentiment that makes children feel special, but within that saying is a sage piece of wisdom for businesses competing in the globalized marketplace. Every consumer is unique; realizing new opportunities demands a new approach to responding to very different product demands by different parts of the world.
There has been a lot of public discussion about where U.S. companies manufacture their products, but as businesses compete globally, it is critical to weigh not just where something is made, but where it is invented and for whom. In the United States and other developed nations, consumers pay hundreds of dollars for the latest gadgets, clothes, and other products. In emerging markets, however, consumers have less purchasing power. Besides, who wants the latest iPhone when a greater concern is access to clean water? Across the globe, there are dramatic differences between what consumers need and how much they are able to pay. Capitalizing on opportunities in emerging markets means companies must take a more thoughtful and targeted approach to innovation.
In a 2009 Harvard Business Review article, “How GE is Disrupting Itself,” Dartmouth professors Vijay Govindarajan and Chris Trimble together with General Electric CEO Jeffrey Immelt coined the term reverse innovation. This is the concept of developing products in emerging markets, tailoring solutions and price-points to local or regional consumers, and then adapting those innovations to sell in developed markets.
This is different from more traditional approaches to product development—what might be termed trickle-down innovation, where products are created for the top of the consumer pyramid (first-world buyers) and are then scaled and adapted to the various markets that make up the rest of the pyramid. This is also called "glocalization." As Govindarajan and his colleagues wrote: "Glocalization worked fine in an era when rich countries accounted for the vast majority of the market and other countries didn’t offer much opportunity. But those days are over—thanks to the rapid development of populous countries like China and India and the slowing growth of wealthy nations.”
With established markets continuing to endure slow growth and the vast majority of the world’s consumers living in developing regions, reverse innovation makes a lot of sense. It upends the notion of a consumer pyramid, instead viewing the global marketplace as complex patchwork of consumer demands and business opportunity. Reverse innovation, however, is not just about creating a product for consumers in developing areas; it is a one-two punch of meeting local consumer demand at a price they can afford and then taking those innovations into developed economies where their low-cost makes them highly competitive.
GE’s electrocardiogram machine is a good example. GE sells a large version in the United States for about $5,000, with each scan costing around $20. This is not an unrealistic cost in a developed nation, but in India, it is far outside the range of what consumers can afford. What is more, the large, difficult-to-move machine is ill-suited for healthcare professionals working in India’s vast rural regions. Recognizing this, GE turned its innovative energy towards creating a machine that addressed the precise need in India and critically, at a reasonable cost for Indian consumers. The result was an $800 portable, battery-operated machine. This not only opened up more of the Indian market to GE’s healthcare products, it also yielded a new product that is ideally suited to first responders in the United States. That is a quintessential example of reverse innovation.
While the concept is easy to grasp, capitalizing on the fruits of reverse innovation is not as simple as parachuting a few engineers into a developing country. It demands a complete overhaul of how companies approach innovation—adapting manufacturing to local methods and capacity, reworking supply chains, adjusting sales efforts to target regional consumers, and changing the overall process of product development. Indeed, the entire innovation process must be based in the local market and not restrained by corporate structures headquartered in developed nations.
In the post-recession world, there is no single market that can yield enduring business success. Even emerging markets, which have been a bastion of growth amidst troubled first-world economies, are showing signs of economic slowdown. HSBC's latest composite emerging markets index shows growth in January at the lowest point in 4 months and substantially lower than a year ago. This does not mean market opportunity is again relegated to developed economies. Rather, it underscores the need to decentralize the innovation process, reaching for all available opportunities in a multifaceted way.
Recognizing that consumers are unique snowflakes may make the innovation process more complex, but it is also the key to unlocking opportunity in a diverse global economy.